Emerging markets debt prices recovered on Friday as investors left safe-haven US Treasury notes in search of higher returns. Capital flows into Latin America were also pushing up currencies and stocks in the region, with the Colombian peso at its strongest level in seven years despite recent government measures to halt the trend.
Rising yields in US Treasuries usually pull investors out of riskier emerging markets, but for the moment investors are still attracted by high returns offered by Latin American assets.
Emerging debt risk spreads tightened 1 basis point to 152 bps over US Treasuries, according to J.P. Morgan's Emerging Markets Bond Index Plus (EMBI+). "Prices are more attractive after Thursday's slight correction. It's the typical market adjustment," Ricardo Amorim, head of Latin America Research at WestLB in New York Branch, said.
Emerging debt returns had declined 0.3 percent on Thursday, while risk spreads widened 5 basis points on the EMBI+, as investors pocketed part of recent gains. Amorim said he expects a correction in China's stock market that could lead to a big sell-off in emerging markets. "But until the China correction comes, markets will remain with an upward trend," he added.
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